Canadian headline CPI is expected to soften to 2.9% year-on-year in June, alongside a 0.2% monthly fall, as lower gasoline and other Energy items weigh on the index. WTI crude dropped by nearly 40% from its Q2 highs and later bottomed below $70 USD in early July; however, pump prices have fallen less as refinery margins widened. Energy is estimated to shave about 0.4 percentage points from the month-on-month reading, while adding roughly 1.0 percentage point to the annual rate, down from 1.5 percentage points in May. The June outcome would keep inflation close to Bank of Canada guidance of 3.0% for Q2.
Core inflation is projected to remain steady, with CPI-trim and CPI-median at 2.0% and 2.1% respectively for a third month, while CPI excluding food and energy edges up by 0.1 percentage point to 1.7% year-on-year. On a three-month annualised basis, CPI-trim and CPI-median are seen holding around 2.4%, even as Shelter disinflation across rents, mortgage interest costs and utilities offsets firmer Food and travel-related prices. Travel services inflation accelerated by 7.5 percentage points in May, with another strong June reading anticipated; FIFA World Cup matches include 13 games in Toronto and Vancouver.
Derivative Trading Strategies for June CPI
With the June inflation release just days away, we recommend derivative traders position for lower yields by going long on Canadian two-year bond futures. A headline drop to 2.9% alongside stable core inflation near 2.0% will likely reinforce expectations for a dovish Bank of Canada. This strategy mirrors market behavior from late 2024, when consistent core inflation deceleration prompted consecutive rate cuts and dragged short-term yields down.
We also suggest leveraging the weakness in the Canadian dollar by purchasing CAD/USD put options in the coming weeks. The massive 40% decline in WTI oil prices from their Q2 highs, combined with a softer loonie, will continue to weigh heavily on the currency. Historically, when Canada’s energy export values decline alongside easing inflation, the USD/CAD exchange rate routinely climbs toward multi-year highs.
Anticipated Volatility in Services and Travel-Related CPI
Finally, traders should prepare for potential volatility spikes in travel-related CPI components due to the 13 FIFA World Cup matches recently played in Toronto and Vancouver. Buying near-term CAD straddles can help us profit from any unexpected upside in services inflation driven by surging accommodation costs. We saw similar brief but violent localized price surges during major concert tours in 2024, which temporarily bloated service inflation metrics before rapidly unwinding.
